Great Southern crash fells expert opinions

By Michael Pascoe

22 May 2009 — 9:02am

I wonder if KPMG is feeling at all nervous about the "independent expert" opinion it provided in January to investors in several Great Southern rural managed investment schemes, advising them that it was both fair and reasonable that they swap their interests in tree and cattle projects for Great Southern shares.

In the great tradition of "independent expert" reports, KPMG came up with the opinion that was pretty much what those commissioning their report wanted. It's what "independent experts" always seem to do - otherwise they wouldn't be hired.

For longer than I can care to remember, I have had a bottle of GIO Anniversary port on offer for the first "independent expert" to publish a report that directly contradicts the hopes of any listed outfit that pays for said report. It's a suitable prize for any demonstration of real independence, commemorating by implication the job done by the doyen of local "independent experts", Grant Samuel, on AMP's disastrous takeover of GIO.

Great Southern indemnified KPMG against any action arising from its reports - but Great Southern doesn't seem to be in much shape to back up the indemnification if it was ever called upon.

Great Southern officers and directors might be more concerned about their own legal positions if one major shareholder I've spoken to follows through on his interest in trying to sue them for what, in his opinion, was misleading conduct.

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Little sympathy

I don't have much sympathy for Great Southern shareholders though - if they had done their homework, they should have known the dubious nature of the business they owned. But one group might be an exception to that: the investors in the cattle scheme that had their cattle interests compulsorily acquired under a scheme of arrangement and swapped for Great Southern shares.

In some of the on-line opinion airing, a few of this sub-class of shareholders voice an understandable anger. They didn't vote for the swap into now-worthless shares but nonetheless lost the lot.

I wonder how much those cattle and tree investors who voted for the swap relied upon the KPMG finding. For that matter, I wonder how much they relied on a regular group of "independent experts" that blessed and ticked the various Great Southern schemes.

Great Southern wasn't very good at growing trees and that's not surprising - it wasn't their main business. Their core activity was selling tax deductions, something they did quite successfully for a while.

They also were good at churning out bumf for their investors, all sorts of stuff about how the trees were going down on the farm. But one of their best efforts at spin was a document that tried to explain why their plantations weren't meeting expectations raised in the tax deduction sale process, or, in Great Southern speak, why "the expected average yields on these Projects as a whole are expected to be at the lower end of the initial yield range".

Great Southern was good at finding excuses, why the real world turned out to be somewhat less glossy than their sales brochures, but what I particularly like is this one:

"The Australian short rotation hardwood plantation industry (particularly on mainland Australia) was still in its infancy in the late 1990s and early 2000s. Great Southern was an early entrant into the industry. While we had a reasonable basis for harvest yields at the time because we followed best practice and were supported by independent experts, they were not, in hindsight, sufficient to accurately predict harvest yields across a wide range of soil and climatic conditions. As a result, expected yields for earlier Projects are down on Prospectus estimates."

In other words, Great Southern didn't know what it was doing when it came to growing trees and, it implies, neither did its "independent experts". So the projects were dud investments.

And Great Southern also wasn't much chop at forecasting woodchip prices either. Or production costs. How could they as they didn't know what they were doing, as implied by this paragraph:

"At the time of preparing the disclosure documents for each of these Projects, Great Southern had limited actual cost history available in order to estimate what the costs may be. Great Southern used the best information available at the time in order to provide an estimate of costs and these estimates were verified by an independent expert on an individual Project basis."

Ah, there's the "independent" expert again. How reassuring.

'Fair and reasonable'

Ten days ago here, we marvelled at KPMG's ability in January to decide it was "fair and reasonable" for owners of the 1998 Great Southern hardwood timber scheme to swap their trees, several months away from harvest, for Great Southern shares that turned out to be somewhat fewer months away from being worthless. And those shares weren't worth much in January either.

But in fairness to that single "independent expert" report, you can almost sense the authors squirming over their "fair and reasonable" call, as they subsequently gave multiple reasons to disbelieve and disregard it.

KPMG's effort on the other seven schemes doesn't show any near as much reticence. Indeed, using KPMG's supplementary "independent expert" report on the 2007 Beef Cattle project as an example, I couldn't help forming the opinion that KPMG was very much in favour of the swap, much more positively inclined than just finding it "fair and reasonable".

Of course the recommendation is well covered with various caveats, but it comes down to this:

"We have concluded that it is reasonable to expect, in the absence of adverse market and other factors and/or events beyond the control of Great Southern, that the aggregate value of a Great Southern share and any attaching dividend following completion of the Scheme should equal or exceed 37.2 cents in current dollar terms at some point in the future."

That 37.2 cents was the share price at which the cattle scheme investors would break even by swapping their holding for a bunch of Great Southern shares issued at a nominal value of 28.45 cents, never mind that they were trading on the market at the time at 17.5 cents.

The single issue that seems to be of most interest to KPMG, the one examined at most length in that January report, is the historical trend of Great Southern shares to trade at a premium to their net tangible backing:

"We have also considered long-term trading patterns, based on the long-term average premium at which shares in Great Southern have traded relative to its NTA backing per share of 39 per cent. In the event that Great Southern's share price was to recover to reflect the long-term average premium, then we have calculated that the theoretical potential re-rated share price would increase to approximately $1.18 per share."

Those long-term patterns were indeed considered at length, with nice big graphs showing how very, very much more than the 37.2 cent break even level Great Southern shares might be worth.

And if I won Oz Lotto, I'd be worth more too.

Worse at running cattle than growing trees

Oh, did I mention that Great Southern was perhaps even worse at running cattle than growing trees? Cattle project investors weren't very happy with the way their scheme was running anyway and thus could have felt quite attracted to that fully spelt-out chance of a much greater return.

But while KPMG spells out the perceived upside, some other matters were allowed to live much less examined lives. For example, it was only mentioned in passing - and even then with a somewhat favourable spin - that Great Southern debt was trading at just 20 cents in the dollar. You might wonder why.

And you might indeed wonder what message the stock market was sending by putting a price of 17.5 cents on Great Southern when the company claimed a net tangible asset backing of 85 cents a share.

The report did include a mention of the Great Southern's auditors' (Ernst & Young) rather wondering about whether it could continue as a going concern, but they didn't qualify the accounts.

And there was this:

"We note, given the current operating profile of Great Southern, there is a risk that the Company may not be in a position to reinstate dividend payments, at least in the short to medium term".

Well they got that right.

KPMG was paid a miserable $20,000 for each of those eight supplementary reports, for the privilege of being made to look somewhat less than perspicacious when Great Southern collapsed four months after they decided it "fair and reasonable" to swap into now-worthless shares.

KPMG was also paid $1 million for other services to Great Southern over the past two years though. That might ease any pain the firm might feel while just checking that their "independent expert" report did cross all legal Ts and dotted any possibly actionable Is, just in case some aggrieved investors start looking for someone to sue.

(And for some reason I am reminded here of a small matter mentioned in Gerard Ryle's fine Firepower book which documents the outrageous success of multi-millionaire fraudster Tim Johnston and his scam by that name. Firepower at one stage was paying KPMG $50,000 a month to help it produce a glossy "Firepower Update Document" with information supplied by Firepower. The document was pure rubbish, but professionally produced rubbish by a firm with a reputable name.)

KPMG's reports on the various Great Southern MIS will join the thick stack of similarly embarrassing documents produced by the "independent expert" trade. I have seen worse.

The rural MIS industry has been particularly well supplied with alleged expert ratings of the investability of the many schemes. Over the several years that I've been sniping at these schemes, I've not ceased to be amazed that no matter how poor a project may be, how few cents in the invested dollar might actually end up going into the soil, some "expert" will have been found to give it an investment rating. They made a living out of it.

If there hadn't been such a terrible waste of money, much of it would be funny.

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And that bottle of GIO Anniversary port continues to lie around my cellar, gathering a thicker layer of dust, suffering a little evaporation through the cork, but not going anywhere.